Healthcare costs remain top of mind in American politics. Polls consistently show that healthcare is one of, if not the top, priority for voters heading into the 2020 election cycle. Politicians and other policymakers face a looming crisis with healthcare expenditures. Medicare and Medicaid, the federal single-payer programs for the elderly and indigent, comprised over a quarter of all federal spending in 2018. This share is rising. According to the Heritage Foundation, healthcare spending increases will comprise 35 percent of total federal spending increases over the next decade, the single largest category of spending growth—eclipsing Social Security, net interest on the national debt, and the rest of discretionary spending. While an aging population is contributing to these increases, healthcare prices themselves are rapidly outpacing inflation.
These facts have naturally turned political attention to healthcare prices. The problem, however, is that this focus has amounted to surface-level examination and proposed solutions from the respective heads of both major political parties. Both Republican President Donald Trump and Democratic Speaker of the House Nancy Pelosi (D-CA) have put forward proposals to address prescription drug prices by tying Medicare payments for drugs to explicit and de facto price controls found in overseas healthcare systems.
President Trump’s proposal is a regulatory change via the Department of Health and Human Services (HHS). Inside HHS is an agency called the Center for Medicare and Medicaid Services (CMS). The Patient Protection and Affordable Care Act (ACA), more commonly referred to as Obamacare, created within CMS the Center for Medicare and Medicaid Innovation (CMMI) to “test innovative payment techniques and service delivery models.” In late 2018, CMMI issued an Advanced Notice of Proposed Rulemaking (ANPRM) that proposed the “International Pricing Index Model for Medicare Part B Drugs.” At its core, the proposed model would tie reimbursements for Medicare Part B drugs, drugs which are generally administered when in the direct care of a healthcare provider, to an index of prices set by explicit price controls and under the nationalized healthcare systems of 16 countries: Austria, Belgium, Canada, Czech Republic, Finland, France, Germany, Greece, Ireland, Italy, Japan, Portugal, Slovakia, Spain, Sweden, and the United Kingdom.
While the proposed International Pricing Index (IPI) model would only explicitly apply to 50 percent of the Medicare program initially, HHS Secretary Alex Azar has openly stated that the program would have spillover effects and drive down prices outside of the model as well.
There are a number of legal problems with this proposal. First, the IPI model almost certainly exceeds the authority of CMMI delegated by Congress. CMMI’s authorizing statute states the agency “shall select models to be tested from models where [it is] determine[d] that there is evidence that the model addresses a defined population for which there are deficits in care leading to poor clinical outcomes or potentially avoidable expenditures.” (42 USC 1315a (b)(2)(A)).
Fifty percent of the entire Medicare system is hardly a defined population and is less-so given the fact HHS openly touts the spillover effects to the other 50 percent and the rest of the healthcare system. Indeed, a less-aggressive CMMI model was ultimately shelved by the Obama administration in 2016 and official withdrawn by the Trump administration in 2017. The decision not to move forward with that model, which would have granted Medicare tools used by healthcare providers and insurance companies to negotiate prices with pharmaceutical manufactures, enjoyed bipartisan support including from then-Minority Leader Nancy Pelosi.
The withdrawal of that model was celebrated because the proposal was seen as a violation of the “noninterference” clause, passed as part of the creation of Medicare Part D. The noninterference clause states that HHS “may not interfere with the negotiations between drug manufacturers and pharmacies and [prescription drug plan] sponsors[.]” (42 USC 1395w-111 (i)). Pegging drug reimbursements to foreign prices in an attempt to drive prices throughout the Medicare system and healthcare sector as a whole makes the proposed IPI a gross violation of the noninterference clause.
Finally, the IPI is problematic for the Trump administration because of CMMI itself. As stated, CMMI is a product of Obamacare. At present, the Trump administration’s Department of Justice (DOJ) is not defending the law in the case of Texas v. United States. The crux of the case is that because Congress zeroed-out the individual mandate penalty of Obamacare under the Tax Cuts and Jobs Act of 2017, the entirety of the law is unconstitutional as it can no longer be considered a tax. In a brief submitted to the Fifth Circuit Court of Appeals, the Trump DOJ wrote, “The district court correctly held that the individual mandate is unconstitutional in light of the elimination of its penalty, that the guaranteed-issue and community rating provisions are inseverable from the mandate, and that the remainder of the ACA [Obamacare] is inseverable in turn.”
What this all means, in short, is that the Trump administration is seeking to transform the prescription drug market through rulemaking at an agency it is actively working to eliminate. Should the courts ultimately rule Obamacare unconstitutional in Texas v. United States, as the Trump administration explicitly desires, CMMI and the IPI would be eliminated.
Legislative versions of the IPI may get around these inherent problems with a regulatory proposal. However, they cannot escape the fact they run afoul of the laws of economics.
Three legislative variants of IPI exist:
- S.102/H.R.465– Prescription Drug Price Relief Act of 2019
- S.997– Transparent Drug Pricing Act of 2019
- H.R.3 – Lower Drug Costs Now Act of 2019
All of these bills have slight variations, yet all rest on the same fundamental and flawed economics as the IPI proposal and the overseas systems upon which the IPI is based: they ignore the true function of prices.
Prices are just information signals to consumers and producers that help allocate resources to their highest-valued uses. Like a weather forecast, they are imperfect and influenced by many factors. Prices are also like weather forecasts in that saying it is sunny outside when it is raining does not stop the rain, it will just lead to people making poor decisions.
Distorted price signals in foreign healthcare markets, in this case price ceilings, have resulted in various forms of shortages. Outside of conventional shortages, where subsidized consumption outstrips disincentivized production, shortages of variety and investment have also resulted. Of the 290 new drugs on the market between 2011 and 2018, 89 percent were available in the U.S. The next highest availability rate in a country under any IPI proposal, regulatory or legislative, was Germany at a mere 62 percent. Availability of new drugs in proposed IPI countries goes as low as 29 percent (Singapore).
The greater access to medicine for American patients can be found in the sales figures as well. Between 2011 and 2016, the United States accounted for roughly two-thirds of sales of all new medicines, compared to a combined 17.5 percent for Italy, France, the United Kingdom, Spain, and Germany.
Pharmaceutical investment and innovation in the U.S. dramatically outpaces the rest of the world in all categories. The U.S. leads in total investment, investment growth, and drug discoveries. The U.S. even outpaces the combined economy of the European Union in all of these areas:
- Total research and development (R&D) spending in 2015:
- U.S.: $47.1 billion
- EU: $37.3 billion
- Average R&D spending growth (2002-2016):
- U.S.: 5.43 percent
- EU: 4.23 percent
- Newly discovered chemical and biological entities (1997-2016):
- U.S.: 304
- EU: 252
- Japan: 102
- Rest of the World: 68
These figures make clear what all the various IPI proposals ignore: changing the price does not lower the cost. While Americans may face higher prices for prescription drugs in some cases, the rest of the world faces grim costs, such as the lack of new, lifesaving treatments.
Without question, something must be done to address exorbitant and climbing healthcare prices. The current budgetary situation with Medicare and Medicaid is untenable. Further, Americans will continue to put healthcare at the top of their voting priorities should healthcare costs continue to rapidly outpace inflation. However, the cost of access and innovation is clearly too high for price controls, especially with the lack of U.S. price controls subsidizing the healthcare systems upon which all the various IPI proposals are based.
Policymakers are right to be concerned with prices, but they must use prices for what they are: measurements. Changing a measurement does not change what it measures. For example, a recent report found that the cost of developing a new drug prior to Food and Drug Administration approval is roughly $2.6 billion. This figure is up nearly 150 percent in real terms in just a decade. Changing the price of a drug does nothing to address this issue, let alone the myriad other factors and perverse incentives throughout the healthcare system ultimately influencing prices. This is to say, in short, that the cost of healthcare is a solvable problem, but the IPI in its various forms isn’t even the beginning of a solution.